Permanent Renters: Another Trend Agents Should Be Watching

One of the most frustrating things potential first-time homebuyers and real estate agents face is a shortage of affordable single family homes.

There are a number of reasons for this shortage. The most common reason is that people are remaining in their homes longer. Prior to the “Great Recession,” families usually moved an average of every seven years. These days, that number is closer to 10 years.

This is in part because so many homeowners saw the value of their properties drop precipitously during that recession and have been waiting for those values to rebound. Now, 10 years after the housing crisis, homebuyers and real estate agents still face a shortage of available homes. This lack of supply makes shopping for a home more competitive, with buyers making bids that are higher than asking price.

Enter the Corporate Landlord

As homeowners found themselves underwater during the housing crisis and defaulted on their loans, Fannie Mae found a new buyer for foreclosed properties — Wall Street. Private equity firms, recognizing a bargain, began purchasing homes and turning them into rental properties. The two largest single-family rental companies, Invitation Homes and American Homes 4 Rent, with more than 135,000 homes between them, are now publicly-traded companies.

“Between 2011 and 2017, some of the world’s largest private-equity groups and hedge funds, as well as other large investors, spent a combined $36 billion on more than 200,000 homes in ailing markets across the country,” writes Alana Semuels for The Atlantic. Places like Phoenix, Florida, Atlanta, Los Angeles, and Dallas all have a high concentration of single family rentals with corporate owners.

Short Term Fix, Long Term Problem?

By purchasing and renting foreclosed properties, corporate investors helped stabilize the housing market. But, just as Wall Street created the mortgage-backed securities (MBS) that played a key role in the housing market crash and worldwide recession that followed, a new financial instrument was born — single-family rental securities (SFRS).

Unlike MBS where the borrowers were individual homeowners, the borrowers of these new asset-backed securities are corporations.

The good news is that the total dollar value of SFRS is significantly smaller when compared to the dollar value of those MBS that we saw in 2008. And while 200,000 rentals is small compared to the 14 million homes that make up the single family rental market, there is the potential to once again destabilize the housing market in these communities should profits and scale fail to meet investor expectations.

It is the renters that find themselves turning to their large corporate landlord when a pipe bursts or roof leaks, that are suffering. Unlike the traditional landlord who lives downstairs or just across town, corporate landlords don’t respond quickly. They also raise rents yearly and are far more likely to issue eviction notices if it serves to improve their bottom line.

The Bottom Line

What began as a proof-of-concept — that the home rental market would generate profits for large investors — is now a reality. To generate profits some of these companies are turning to added fees, withholding security deposits, and evicting tenants who complain too much. To meet demand, some have even begun to add new construction to their inventories. And, while corporate single family home rentals are only a small portion of the larger housing market, they have had a significant impact on individual real estate agents or brokerages in the markets mentioned above. More renters results in less buyers. And rising home prices threaten to make renting permanent for many would be first time buyers.